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Dividend Payments and Repurchases of Preferred Stock and Warrants'
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Testimony:
Before the Committee on Financial Services, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 10:00 a.m. EDT:
Thursday, July 9, 2009:
Troubled Asset Relief Program:
Status of Participants' Dividend Payments and Repurchases of Preferred
Stock and Warrants:
Statement of Gary T. Engel:
Director, Financial Management and Assurance:
GAO-09-889T:
Mr. Chairman, Ranking Member Bachus, and Members of the Committee:
I am pleased to be here today to discuss certain of our work on the
Troubled Asset Relief Program (TARP), under which the Department of the
Treasury (Treasury) has the authority to purchase and insure through
its Office of Financial Stability (OFS) up to almost $700 billion in
troubled assets held by financial institutions.[Footnote 1] As you
know, Treasury was granted this authority in response to the financial
crisis that has threatened the stability of the U.S. banking system and
the solvency of numerous financial institutions. The Emergency Economic
Stabilization Act of 2008 (the act) that authorized TARP on October 3,
2008, requires us to report at least every 60 days on the findings
resulting from our oversight of the actions taken under the program,
which includes, among others things, outflows and inflows of funds.
[Footnote 2] We are also responsible for auditing TARP's annual
financial statements.
My statement today is based primarily on certain information in our
June 17, 2009, report--our fifth report under the act's mandate--which
covers TARP activities as of June 12, 2009.[Footnote 3] Specifically,
this statement includes information on (1) terms and rates for dividend
payments from participants, (2) the dividend payments received through
June 30, 2009, from participants, and (3) repurchases of preferred
stock and warrants[Footnote 4] by participants. To do this work, we
reviewed documents provided by OFS and conducted interviews with
officials from OFS. In addition, we have updated the dollar amounts and
numbers as of June 30, 2009.
We conducted the performance audit for our June 17, 2009, report
between April 2009 and June 2009 in accordance with generally accepted
government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide
a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objectives.
In Summary:
According to Treasury, as of June 30, 2009, Treasury had disbursed
about $339 billion in TARP funds. Although most of the disbursements
have been for the Capital Purchase Program (CPP), Treasury has utilized
other programs as well. The agreements entered into under the various
programs for the purchase of preferred stock entitled Treasury to
receive dividends on varying terms and at varying rates. For example,
according to the CPP terms for publicly held institutions,
participating institutions pay Treasury quarterly dividends at a rate
of 5 percent per year for the first 5 years on the preferred stock
acquired by Treasury.
According to Treasury, from TARP's inception through June 30, 2009,
Treasury received approximately $6.7 billion in dividend payments on
preferred stock acquired through the CPP,[Footnote 5] Targeted
Investment Program (TIP), Automotive Industry Financing Program (AIFP),
and Asset Guarantee Program (AGP). The dividend payments received are
generally deposited into the General Fund of the U.S. Treasury and are
not to be used to reduce the outstanding balance under the almost $700
billion TARP limit.
According to Treasury records, as of June 30, 2009, 32 institutions,
including 10 of the largest bank holding companies participating in
TARP, had repurchased their preferred stock from Treasury for a total
of about $70.1 billion.[Footnote 6] Also, as of June 30, 2009, 11
financial institutions had repurchased their warrants and 3
institutions had repurchased their warrant preferred stock from
Treasury at an aggregate cost of about $20.3 million.[Footnote 7] Funds
received from the repurchases of initial preferred stock are deposited
into the General Fund of the U.S. Treasury and reduce the outstanding
balance under the almost $700 billion TARP limit. Treasury may then
issue new debt to purchase new financial instruments if it so chooses
until December 31, 2009, or a later date determined by the Secretary of
the Treasury under the sunset provision of the act. However, like the
dividend payments, any amounts received from the repurchases of
warrants and warrant preferred stock are deposited in the General Fund
of the U.S. Treasury and are not to be used to reduce the outstanding
balance under the almost $700 billion TARP limit.
As of June 30, 2009, Treasury had disbursed approximately $339 billion
in TARP funds, had approximately $102 billion outstanding in additional
obligations to purchase or insure troubled assets, and had received
approximately $70 billion from preferred stock repurchased by CPP
participants.[Footnote 8] As a result, Treasury has approximately $328
billion remaining under the almost $700 billion limit on the amount of
purchased or insured troubled assets that Treasury may have outstanding
at any time (the almost $700 billion TARP limit reduced for $339
billion in disbursements and $102 billion in obligations, and increased
by $70 billion in preferred stock repurchases).
Agreements under Certain TARP Programs Entitle Treasury to Receive
Dividend Payments on Varying Terms and at Varying Rates:
The agreements under the various TARP programs--CPP, TIP, AIFP, AGP,
and the Systemically Significant Failing Institutions Program (SSFI)--
for the purchase of preferred stock entitle Treasury to receive
dividend payments. However, the terms and rates vary by program and
type of institution. For example:
* According to the CPP terms for publicly held institutions,
participating institutions pay quarterly dividends at a rate of 5
percent per year for the first 5 years on the preferred stock acquired
by Treasury. After the first 5 years, the preferred stock pays
quarterly dividends at a rate of 9 percent per year.[Footnote 9]
* According to the CPP terms for privately held institutions,
participating institutions pay quarterly dividends at a rate of 5
percent per year for the first 5 years on the initial preferred stock
acquired by Treasury.[Footnote 10] After the first 5 years, the
preferred stock pays quarterly dividends at a rate of 9 percent per
year. Any preferred stock of privately held institutions acquired
through Treasury's exercise of warrants pays quarterly dividends at a
rate of 9 percent per year.
* Under the terms of the TIP agreements, Citigroup and Bank of America
pay quarterly dividends on preferred stock acquired by Treasury at a
rate of 8 percent per year.
* Under the terms of the AGP agreement, Citigroup pays quarterly
dividends at a rate of 8 percent per year on the preferred stock issued
as a premium for the guarantee provided by Treasury in accordance with
section 102 of the act.
* Under the terms of the restructured SSFI agreement, American
International Group Inc. (AIG) pays quarterly dividends on preferred
stock issued to Treasury at a rate of 10 percent per year.[Footnote 11]
Importantly, each dividend payment to Treasury is contingent on each
institution declaring dividends. The dividend payments received under
CPP, TIP, SSFI, and AIFP are deposited into the General Fund of the
U.S. Treasury. The dividend payments received under AGP are deposited
into the Troubled Assets Insurance Financing Fund to fulfill
obligations of any guarantees provided to financial institutions
pursuant to section 102 of the act. Dividend payments from TARP
participants--other than AGP participants--to Treasury are not
available to be used to reduce the outstanding balance under the almost
$700 billion TARP limit.
Treasury Has Received Approximately $6.7 Billion in Dividend Payments:
From TARP's inception through June 30, 2009, Treasury received
approximately $6.7 billion in dividend payments on preferred stock
acquired through CPP, TIP, AIFP, and AGP (table 1).
Table 1: TARP Dividend Payments Received as of June 30, 2009 (Dollars
in thousands):
Program: Capital Purchase Program (CPP);
Dividend payments received: $5,254,685;
Cumulative dividends not declared and not paid: $5,962;
Noncumulative dividends not declared and not paid: $802.
Program: Targeted Investment Program (TIP);
Dividend payments received: $1,128,889;
Cumulative dividends not declared and not paid: [Empty];
Noncumulative dividends not declared and not paid: [Empty].
Program: Automotive Industry Financing Program[A] (AIFP);
Dividend payments received: $159,611;
Cumulative dividends not declared and not paid: [Empty];
Noncumulative dividends not declared and not paid: [Empty].
Program: Asset Guarantee Program (AGP);
Dividend payments received: $107,573;
Cumulative dividends not declared and not paid: [Empty];
Noncumulative dividends not declared and not paid: [Empty].
Program: Systemically Significant Failing Institutions Program (SSFI);
Dividend payments received: [Empty];
Cumulative dividends not declared and not paid: [Empty];
Noncumulative dividends not declared and not paid: [Empty][B].
Program: Total; Dividend payments received: $6,650,758;
Cumulative dividends not declared and not paid: $5,962;
Noncumulative dividends not declared and not paid: $802.
Source: Treasury OFS, unaudited.
[A] Dividend information for AIFP only relates to GMAC LLC.
[B] See footnote 11.
[End of table]
According to Treasury records, from March 21, 2009, through June 30,
2009, 17 CPP participants had not declared or paid dividends of
approximately $6.6 million. Specifically, 7 institutions did not
declare and pay their cumulative dividends of approximately $6 million
and 10 institutions did not declare and pay their noncumulative
dividends of approximately $666,000. OFS said it received notification
from the 17 institutions that they did not intend to declare or pay
their May 15, 2009, quarterly dividends. According to OFS officials, of
the 17 institutions, 13 informed Treasury that state or federal banking
regulations or policies restricted them from declaring dividends, 1
indicated concern about its profitability, and 3 did not provide an
explanation as to why they did not declare dividends. According to the
standard terms of CPP, after six nonpayments by a CPP institution--
whether or not consecutive--Treasury and other holders of preferred
securities equivalent to Treasury's can exercise their right to appoint
two members to the board of directors for that institution at the
institution's first annual meeting of stockholders subsequent to the
sixth nonpayment.
As reported in our March 2009 report, from TARP's inception through
March 20, 2009, eight participants did not declare or pay approximately
$150,000 in noncumulative dividends.[Footnote 12] Five of the eight
were among the 17 institutions that did not declare or pay dividends
during the period from March 21, 2009, through June 30, 2009, noted
above. Two of the eight paid their most recent dividend payments for
the May 15, 2009, quarterly dividend payment date. The other
participant subsequently declared and paid the approximately $14,000 in
noncumulative dividends previously not paid and its most recent May 15,
2009, quarterly dividend.
Financial Institutions Have Begun to Repurchase Their CPP Preferred
Stock and Warrants from Treasury but the Process Lacks Adequate
Transparency:
As permitted by the act--as amended by the American Recovery and
Reinvestment Act of 2009 (ARRA)--participants may repurchase or buy
back their preferred stock and warrants issued to Treasury under CPP at
any time, subject to consultation with the primary federal banking
regulator.[Footnote 13] According to Treasury records, as of June 30,
2009, 32 institutions had repurchased their preferred stock from
Treasury for a total of about $70.1 billion, including 10 of the
largest bank holding companies participating in CPP. Table 2 provides
additional information about the repurchases. Under the terms of the
CPP and ARRA, after all the preferred stock is repurchased, the
financial institution may repurchase all or part of the warrants held
by Treasury. As of June 30, 2009, 11 of the 32 financial institutions
that repurchased their preferred shares from Treasury had repurchased
their warrants and 3 others had repurchased their warrant preferred
stock from Treasury at an aggregate cost of about $20.3 million. None
of the 10 largest bank holding companies that repurchased its preferred
stock had repurchased its warrants as of June 30, 2009. In addition,
certain financial institutions had informed Treasury that they did not
plan to repurchase their warrants. For those institutions that informed
Treasury that they did not intend to repurchase their warrants,
Treasury may attempt to sell the warrants in the financial markets.
According to a Treasury official, as of June 30, 2009, Treasury has not
yet liquidated any CPP warrants in the financial markets.
Table 2: Capital Purchase Program Repurchases as of June 30, 2009
(Dollars in thousands):
Institution type: Private Institutions;
Repurchase amount for preferred stock initially issued to Treasury:
$31,900;
Repurchase amount for preferred stock issued through exercise of
warrants: $1,595;
Repurchase amount for warrants: N/A.
Institution type: Public Institutions;
Repurchase amount for preferred stock initially issued to Treasury:
$70,092,689;
Repurchase amount for preferred stock issued through exercise of
warrants: N/A;
Repurchase amount for warrants: $18,690.
Institution type: Total;
Repurchase amount for preferred stock initially issued to Treasury:
$70,124,589;
Repurchase amount for preferred stock issued through exercise of
warrants: $1,595;
Repurchase amount for warrants: $18,690.
Source: Treasury OFS, unaudited.
N/A = not applicable.
[End of table]
Although institutions have repurchased their preferred stock, the
regulators' repurchase approval criteria have lacked adequate
transparency. The Federal Reserve has provided criteria for the 19
largest bank holding companies, but the other regulators have not
consistently provided details about how they have made repurchase
determinations and how they will make future determinations. Clearly
articulated and consistently applied criteria are indicative of a
robust decision-making process, and without them Treasury will face an
increased risk that institutions requesting repurchase of their stock
may not be treated equitably. In this regard, we recommended in our
June 17, 2009, report that Treasury, in consultation with the Chairmen
of the Federal Deposit Insurance Corporation and the Federal Reserve,
the Comptroller of the Currency, and the Acting Director of the Office
of Thrift Supervision, ensure consideration of generally consistent
criteria by the primary federal regulators when considering repurchase
decisions under TARP.[Footnote 14] We have begun to receive the
criteria from the federal banking regulators and will evaluate their
consistency as part of our ongoing TARP work.
Treasury has provided limited information about the warrant repurchase
process on its Web site [hyperlink, http://www.financialstability.gov].
We recognize the challenges associated with valuing warrants in the
absence of readily available markets for these instruments. For this
reason, and because the valuation process can be assumption driven, a
well-designed, fully vetted transparent process becomes critical to
defusing questions about the warrant valuation process and whether the
resulting prices paid by the institutions reflect the taxpayers' best
interests. While Treasury has provided some limited information about
the valuation process, it has yet to provide the level of transparency
at the transaction level that would begin to address such questions. In
this regard, we recommended in our June 17, 2009, report that Treasury
ensure that the warrant valuation process maximizes benefits to
taxpayers and consider publicly disclosing additional details regarding
the warrant repurchase process, such as the initial price offered by
the issuing entity and Treasury's independent valuations, to
demonstrate Treasury's attempts to maximize the benefit received for
the warrants on behalf of the taxpayer.[Footnote 15] On June 26, 2009,
Treasury issued a press release detailing certain information about the
warrant repurchase process and indicating that Treasury plans to begin
publishing additional information on each repurchased warrant. We will
evaluate Treasury's disclosure of warrant information as part of our
ongoing TARP work.
Closing Comments:
Treasury has received billions of dollars from TARP recipients in
dividend payments and participants' repurchases of the preferred stock
and warrants. While Treasury has been receiving such payments, it also
has continued to disburse funds. As of June 30, 2009, Treasury had
disbursed almost $339 billion among five programs--CPP, SSFI, TIP,
AIFP, and the Term Asset-Backed Securities Loan Facility (TALF).
Specifically, according to Treasury records, it has disbursed just
about $203 billion under CPP, about $41 billion to AIG under SSFI, $40
billion under TIP, over $54 billion to participants under AIFP, and
$100 million under TALF. As of June 30, 2009, Treasury's projected use
of TARP funds totaled about $643 billion, without taking into account
any repayments.
Mr. Chairman and Ranking Member Bachus, this concludes my prepared
statement. I would be pleased to respond to any questions that you or
other members of the committee may have at this time.
GAO Contact:
For further information on this testimony, please contact Gary T. Engel
at (202) 512-8815 or engelg@gao.gov.
[End section]
Footnotes:
[1] The Emergency Economic Stabilization Act of 2008 (the act), Pub. L.
No. 110-343, 122 Stat. 3765 (2008) originally authorized Treasury to
buy or guarantee up to $700 billion in troubled assets. The Helping
Families Save Their Homes Act of 2009, Pub. L. No. 111-22, div. A,
amended the act and reduced the maximum allowable amount of outstanding
troubled assets under the act by almost $1.3 billion, from $700 billion
to $698.741 billion.
[2] Pub. L. No. 110-343, 122 Stat. 3765 (2008). The act requires the
U.S. Comptroller General to report at least every 60 days, as
appropriate, on findings resulting from oversight of TARP's performance
in meeting the act's purposes; the financial condition and internal
controls of TARP, its representatives, and agents; the characteristics
of asset purchases and the disposition of acquired assets, including
any related commitments entered into; TARP's efficiency in using the
funds appropriated for its operations; its compliance with applicable
laws and regulations; and its efforts to prevent, identify, and
minimize conflicts of interest among those involved in its operations.
[3] GAO, Troubled Asset Relief Program: June 2009 Status of Efforts to
Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-658] (Washington, D.C.: June 17,
2009).
[4] A warrant is an option to buy shares of common stock or preferred
stock at a predetermined price on or before a specified date.
[5] For some of the CPP participants, Treasury acquired cumulative
preferred stock while for others it acquired noncumulative preferred
stock. If an institution does not declare a dividend for noncumulative
preferred stock during the dividend period, the noncumulative preferred
shareholders generally have no right to receive any dividend for the
period, and the institution has no obligation to pay a dividend for the
period, whether or not dividends are declared for any subsequent
dividend period. Generally, if an institution does not declare a
dividend for cumulative preferred stock during the dividend period the
unpaid dividends accumulate and the institution must pay the cumulative
accrued dividends before making dividend payments to other classes of
shareholders.
[6] Our use of the term repurchases in this testimony is general and
does not differentiate between repurchases and redemptions of senior
preferred stock. A redemption of senior preferred stock occurs when an
institution completes a qualified equity offering per the standard
terms of the preferred stock and subsequently exchanges cash for its
senior preferred stock previously issued to Treasury. A repurchase
occurs when the institution buys back its senior preferred shares
without having completed a qualified equity offering, as permitted by
the American Recovery and Reinvestment Act (ARRA), Pub. L. No. 111-5,
div. B, § 7001, 123 Stat. 115, 516 (2009), or another authority.
[7] In addition to preferred stock, Treasury also received from the
privately held institutions warrants to purchase a specified number of
shares of preferred stock, called warrant preferred stock, that pay
quarterly dividends at a rate of 9 percent per year. The exercise price
for the warrant preferred stock is $0.01 per share unless the financial
institution's charter requires otherwise. Unlike for publicly held
institutions, Treasury exercised these warrants immediately for warrant
preferred stock.
[8] The additional obligations outstanding include approximately $29
billion in the undisbursed portion of an equity facility under the
Systemically Significant Failing Institutions Program (SSFI), $30
billion relating to AIFP, $20 billion relating to Term Asset-Backed
Securities Loan Facility (TALF), $18 billion relating to Making Home
Affordable, and $5 billion in obligations under AGP. These amounts do
not include a subtraction from the outstanding guarantee amount to
reflect the balance in the Troubled Asset Insurance Financing Fund as
stipulated in section 102 of the act.
[9] Treasury also received from each publicly held institution a
warrant to purchase a specified number of shares of common stock.
[10] The term initial preferred stock refers to the preferred stock
acquired by Treasury from privately held CPP institutions as a result
of the initial investment amount.
[11] AIG is the sole participant in SSFI. On April 17, 2009, AIG and
Treasury restructured their November 25, 2008, agreement. Under the
restructuring, Treasury exchanged $40 billion of cumulative Series D
preferred shares for $41.6 billion of noncumulative Series E preferred
shares. The amount of Series E preferred shares is equal to the
original $40 billion, plus approximately $733 million in undeclared
dividends as of the February 1, 2009, scheduled quarterly dividend
payment date, $15 million in dividends compounded on the undeclared
dividends, and an additional $855 million in dividends accrued from
February 1, 2009, but not paid as of April 17, 2009. AIG's restructured
agreement kept the quarterly dividend payment dates of every May 1,
August 1, November 1, and February 1, established by the original
November 25, 2008, agreement. However, the restructured agreement also
specified that dividends were payable beginning with the first dividend
payment date to occur at least 20 calendar days after the restructuring
date. Accordingly, in compliance with these dividend payment terms, the
dividend payment for the period from April 17, 2009, through May 1,
2009, which amounts to approximately $150.2 million, is to be included
in the August 1, 2009, scheduled quarterly dividend payment.
[12] GAO, Troubled Asset Relief Program: March 2009 Status of Efforts
to Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-504] (Washington, D.C.: Mar. 31,
2009).
[13] Pub. L. No. 111-5, 123 Stat. 115 (2009). Section 7001 provides, in
part, that "Subject to consultation with the appropriate Federal
banking agency, if any, … Treasury shall permit a TARP recipient to
repay any assistance previously provided under the TARP to such
financial institution, without regard to whether the financial
institution has replaced the funds from any other source or to any
waiting period." (Emphasis added.) ARRA also required that Treasury
liquidate the warrants when the assistance was repaid. This requirement
was amended by the Helping Families Save Their Homes Act of 2009, Pub.
L. No. 111-22, which removed the requirement that Treasury liquidate
the warrants when the assistance is repaid.
[14] [hyperlink, http://www.gao.gov/products/GAO-09-658].
[15] [hyperlink, http://www.gao.gov/products/GAO-09-658].
[End section]
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